Back in 2010, retailer J.C. Penney (NYSE:JCP) was struggling, as sales and profits were flatlining. At that time, activist investor Bill Ackman, through his Pershing Square fund, started building an 18% position in the company. Additionally, Steven Roth of Vornado Realty Trust started buying shares, and built himself an 8% stake in the retailer. Together, the two controlled 26% of the company's shares and gained positions on the board of directors.

Ackman and Roth both wanted to buy into the retailer, gain the ears of the board and top management, and promote changes to the way the company was being run. They did just that. The two brought in Ron Johnson, who changed J.C. Penney's business model, as the retailer attempted to build a store-within-a-store concept, and ban the promotions and deals that the company had relied on in the past to move merchandise and get customers in the doors. Unfortunately, these grand plans did not work. Roth cut his position in the company during the spring of 2013, and Ron Johnson was ousted by the board. Ackman stepped down from his board of director's position, and then sold his 39 million shares. 

Ackman's average price for his 18% stake has been estimated at around $23 per share, and we know he got out around $12. Not a good investment for himself or any individual investors who followed his move. Ackman lost around $500 million on this one investment alone. While that certainly hurts his personal reputation and confidence in his fund, Ackman himself is doing just fine financially. While part of his personal wealth is tied up in the Pershing Square fund, the bulk of the money comes from other investors who signed up for a certain amount of risk when they give Ackman their money.

Most hedge funds are setup in a way that allows the manager to take more extreme risks than a mutual fund or an index fund would take. Furthermore, as an average investor, you may not be aware of all the risks and ways the fund manager is hedging against those risks if you were to blindly follow him or her into a position. Additionally, as we have seen a number of times with J.C. Penney in the past, when activists announces they are buying, shares rise, and when they report they are selling, the stock tumbles.

Just today we saw shares of Safeway (NYSE:SWY) fall 4.59% after Jana Partners reported that it had cut its stake in the grocer after the company said it was going to shrink its store count after Jana pushed for this change. In the case of Safeway, Jana pushed for changes, and the stock rose nearly 20% since the activist investor first reported owning shares. But with the announcement yesterday that it cut its holding, the stock fell. 

Final thoughts
Regardless of whether an individual investor makes money or loses money copying an activist, the fact is that the individual investor is playing a different game entirely. First and foremost, the losses are the individual's money, not someone else's. Second, the hedge fund or activist investor has reviewed the risk, and possibly protected themselves from some of it. And third, the information on buy and sell moves is old and outdated, meaning that actual losses and gains will never match those of the hedge fund. If you're simply trying to match the returns of a hedge fund manager, stop trying to copy them and send them a check so they can manage your money for you, and you will get their returns.

Lastly, I will say that it can be informative to follow what the smart money is buying and selling -- but only for new ideas and as a learning tool, not simply for the sake of copying their moves. Whether you're a new investor or old one, remember that conflicting opinions about stocks and the prices at which they should be trading, is what makes a market.  Straying from the herd at times is the best way to find value that others are not recognizing.

Fool contributor Matt Thalman has no position in any stocks mentioned. Check back Monday through Friday as Matt explains what causing the big market movers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513.

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